Wall Street Loves Mesabi Trust. Should You?

Despite all of Wall Street's conflict and contention, a fortunate few companies enjoy unanimous support among professional analysts. If the market's movers and shakers all believe these companies will beat the long-term averages, well, surely they will -- right?

Not so fast! With help from Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings of one to five stars, we'll see whether these highflying favorites deserve analysts' unwavering support.

Today we'll take a look at Mesabi Trust (NYSE: MSB  ) , a mining specialist that derives its riches from the ore extracted from the Mesabi Iron Range in Minnesota, with its biggest stake being its Peters Lease. When it comes to investing in trusts of this sort, it's important to be mindful of when a trust agreement expires, because they have a finite life and you can get burned buying in too late. For example, Great Northern Iron Ore Properties (NYSE: GNI  ) possesses a trust that runs out in 2015, meaning it will soon be dissolved.

Amongst the analysts that CAPS tracks, two have weighed in on Mesabi and they unanimously agree it will outperform the indexes. The investor community, however, is hedging its bets: While 96% rate Mesabi to outperform the broad market averages, they also assign it a middling three-star CAPS rating, suggesting they think there are still better places for your money. Not surprisingly, they've given Great Northern a one-star rating.

Of course, just because Wall Street loves ' em doesn't mean you have to. Analyst sentiment is only just the jumping-off place for your own research.

A ticking time bomb
While each trust is set up somewhat differently, there's often a "doomsday clock" embedded in each trust agreement that's triggered when a certain event occurs. For Great Northern, the countdown began on April 6, 1995, when the last founding member of the trust died, after which it had 20 years left on it. MV Oil Trust (NYSE: MVO  ) , which exploits oil and natural gas properties in the Mid-Continent region in Kansas and Colorado, will expire either on June 30, 2026, or whenever 14.4 million barrels of oil equivalent have been produced from its wells, whichever comes later. As of its last annual filing, the underlying properties with approximately 1,000 wells primarily producing oil have a projected reserve life of at least 50 years. Sounds like it will be around for awhile.

And for the Mesabi Trust, which is a subsidiary of Cliffs Natural Resources (NYSE: CLF  ) , it has 21 years after the death of the last of the 25 people named in the Peters Lease. Since the youngest is roughly 51 years old, it presumably has many years left to operate as well. Even its smaller Cloquette Lease doesn't terminate until 2040.

Risky business
Dividends are the major reason investors seek out the trusts, and they compensate you for the relative degree of risk involved in them. Great Northern's dividend yields almost 29% annually, while MV Oil's dividend is north of a 10% return. Because of a seemingly more stable situation, Mesabi's dividend is 7.7% currently.

Yet low risk doesn't mean no risk. Mesabi is highly dependent on demand for steel and how well Cliffs can sell iron ore pellets into the market, particularly through its Northshore Mining operation in Minnesota, which leases and operates the lands of the Mesabi Trust. ArcelorMittal has previously been a major customer of Cliffs' output.

Yet declining iron ore prices and rising costs have hampered the miner's profitability in recent quarters, so in November it announced it was halting production at Northshore and at its Empire Mine in Michigan. The trust believes production curtailment at Northshore and the layoff of 125 employees will have a negative impact on production attributable to the trust this year and production may fall below 2012's output. It just warned that its upcoming distribution for February would only be $0.49 per unit, a precipitous 35% decline from the $0.76 it paid out a year ago.

A one-off event
While China's slowdown in purchasing iron and steel is partly to blame for the price volatility being felt around the world, steel is still being used in the production of appliances for new homes and in vehicle sales here at home. Analysts anticipate that Cliffs' move is isolated and that we won't see others with interests in the area, such as Arcelor or U.S. Steel, following suit.

There's a diminished outlook facing it for 2013 at least, but let me know in the comments section below if you trust the Mesabi Trust to bounce back.

Agree to disagree
Cliffs Natural Resources has grown from a domestic iron ore producer into an international player in both the iron ore and metallurgical coal markets. It has performed well, relative to many competitors, in a very cyclical industry because of several factors that are likely to remain advantageous for Cliffs' management. For details on these advantages and more, click here now to check out The Motley Fool's brand new premium report on the company.

 


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